Normal Interest Rates Would be a Disaster for U.S. Debt

If fewer people are willing to lend us money, the more we’ll have to shell out in higher interest payments. And if bond buyers lose confidence in our ability to make good on that debt, things could get really ugly, really fast.

As Sen. Tom Coburn (R., Okla.), who served on the deficit commission and supported its recommendations, pointed out at a press conference this week, the United States has, historically, paid an average of 6 percent interest on its debt. It currently pays about 2 percent. If rates were to return simply to that historical average, it would involve an increase to our overall interest bill of $640 billion to be paid immediately. “An impossible situation,” in Coburn’s words.

And that’s why the Federal Reserve is buying U.S. Treasuries. If they didn’t, the U.S. would have to pay higher interest rates on its debt, and we can’t afford to.

None of this can go on forever. The Fed can’t print money forever. The U.S. can’t borrow huge fractions of GDP forever. Austerity is coming. The only question in my mind now is whether we’ll have a currency collapse and hyperinflation first.

15 Responses to Normal Interest Rates Would be a Disaster for U.S. Debt

Les, what happens if the Japanese stop purchasing (temporarily perhaps) treasuries as they invest in the re-building of their country? Wouldn’t that have a negative effect if we cannot persuade another country to step in and purchase those treasuries…. interest rates would increase. Right?

Japan was already in big trouble with an aging population and birthrate below replacement. It is virtually certain that they will begin dumping our debt. And didn’t the IMF (or World Bank) estimate a worldwide liquidity shortage of $100T just a few months ago? The world may have just gone over the proverbial cliff and not even know it yet!

“The only question in my mind now is whether we’ll have a currency collapse and hyperinflation first.” Somewhere prior to this, I think they’ll be gnawing the legs off of the “rich”, in an act of futile desperation, and then order them to ‘produce!’. Maybe John Galt will jump around the corner and save them.

If only we operated under a fiat currency system with a floating non convrtible currency. That way the government would spend by debiting it’s account at the Fed and crediting a Fed member account. The money that went to buy government bonds would come from government spending. We wouldn’t rely on China or Japan to buy our bonds. They would buy bonds as a means of keeping their currency from appreciating vs the USD so they could maintain a trade surplus. Private secor savings would exactly equal the public sector deficit and the yeild curve would rise and fall based on fed rate hike expectaions.
Oh well, maybe one day we will get there. IN the eman time we are doomed to the same fate as Japan with 250% debt to GDP, 1.2% 10 year yields ( before the quake) and a strong currency.
Hang in there!

We do not have the political will (or leadership in the White House) to cut spending, and the tax rates needed to close the deficit gap would cripple growth. Hence, inflation is a certainty. The only questions are how much and when will it show up in earnest.

We are witnessing a game of chicken between the Democrats and the Republicans on the issue of the debt. The Republicans want to cut spending, and the Democrats are daring them to do that without bipartisan support. The preliminary demagogery has already begun.

The Democrats want to raise taxes but if they do without a “deal” with the Republicans, they will be run out of Washington next election. Ergo, no one will do anything material to head off the debt crisis until somebody blinks.

If the fed stops buying US bonds, we get higher interest rates, and even higher US debt, eventually leadinf to default. If the fed continues to buy US bonds, we eventually get currency collapse, and hyper inflation, leading to economic collapse.

And in the midst of all this, Obama, Reid, and the dems loudly call a pitiful 60b in repub cuts “draconian” so they can still subsidize cowboy poetry??? Even the repubs aren’t doing enough, but the dems are so irresponsible it borders on either stupidity or criminality.

And idiots like Michael Moore still claim we can get out by taxing the rich, when complete confiscation of every billionaires assets will pay for a single year of deficit, still leaving the debt untouched. And they call us Tea Partiers stupid? We need massive spending cuts now, and for many years in the future, but Obama and Reid fiddle, to cowboy poetry, while the US burns.

We need to double the size of the house Tea Party caucus in 2012, and elect a bunch of Tea Party people in place of senate dems, and Obama, in 2012. That or face currency collapse, default, hyper inflation, and other disasters. I am not certain there are still enough people left in this country to face fiscal reality, and support the Tea Party, and support real spending cuts, including entitlements, but if we dont, we only have a few years left before disaster strikes.

To any dems that dont like the repub cuts, do the responsible thing and propose alternate equivalent cuts of your own. You might even be able to find Tea Party repubs willing to compromise and support many of your cuts. But then I forget, dems are incapable of responsibility. They are only capable of pandering and lies. Mind you the repubs under Bush were not a whole lot better. But now that the repubs are dominated by the Tea Party, they are finally willing to propose real cuts. But where are the dems to join them?